Overview
Last week, the New York-based US Court of International Trade struck down President Donald Trump’s tariffs issued through the International Emergency Economic Powers Act (IEEPA)—only for the decision to be given a temporary stay the next day by the US Court of Appeals for the Federal Circuit as the legal challenge continues. The limbo for presidential trade authority, combined with the speed of negotiations, has given diplomats and market watchers alike whiplash, but the Trump administration will still manage to find ways to enact its trade agenda and rectify perceived imbalances in the US trade deficit. As negotiations continue, the key question is whether counterparties will seek to utilize uncertainty over IEEPA-based tariffs to accelerate or stall a deal.
An accelerated timeline increases the likelihood of carve-outs and deals for sectors considered central to economic security, with upside risks for most sectors. Meanwhile, delayed deal-making, while perhaps maximizing gains for counterparties, could complicate negotiations and backfire, with potential downside risks for the global economy and businesses navigating a patchwork of diverse deals.
The Trump Administration Still Has Ample Trade Authorities to Draw Upon
IEEPA is the administration’s tool of choice to conduct trade policy, providing maximum flexibility and speed to impose tariffs in the case of an “unusual and extraordinary” threat. Nonetheless, IEEPA was used for only two types of (albeit sweeping) tariffs. The Trump administration first used IEEPA in early February to impose 25% blanket tariffs on China, Mexico, and Canada due to fentanyl-related trafficking, which was used as a source of leverage to kickstart trade and counternarcotics negotiations. The Trump administration then invoked IEEPA on April 2 to impose a baseline 10% tariff on virtually all US trading partners along with higher “reciprocal” tariffs on 60 countries, treating the trade deficit itself as a national security threat.
However, even if Trump’s IEEPA-based tariffs are indeed struck down, the administration will maintain ample authorities to impose trade restrictions to achieve its stated policy objective of rectifying bilateral trade imbalances. One authority that has thus far not been used is Section 122 of the Trade Act of 1974, which allows the President to impose up to 15% tariffs on all imports for 150 days, after which Congressional approval would be needed. This would effectively allow the global minimum 10% tariff to remain in place. This could provide enough time for new Section 301 and Section 232 investigations to begin, ongoing investigations to conclude, and for terminated investigations to be renewed—allowing for some continuity in trade restrictions. Congress could sustain the blanket tariff under Section 122 or amend IEEPA to explicitly allow for the April 2 tariffs, since their reconciliation bill priced in their estimated revenue of $2.1 trillion over ten years.
While the courts clarify the legal bounds of IEEPA-based tariffs, the Trump administration may lean on sectoral tariffs in industries where the Commerce Department has determined a threat to US national security (Section 232 of the Trade Expansion Act of 1962) or where the US Trade Representative has determined unjustified discrimination against US firms (Section 301 of the Trade Act of 1974). A significant portion of the Trump-era tariffs derive from these authorities—including tariffs on steel, aluminum, and automobiles—and Trump has already shown willingness to increase them in a bid to maintain negotiating leverage, doubling the steel and aluminum tariff rates from 25% to 50% in late May.
Several Section 232 investigations remain ongoing, including in several high-value sectors. For example, the US’ investigation into pharmaceuticals will likely cover $100.4 billion in imports of packaged medication and over $3 billion in active pharmaceutical ingredients; an investigation into commercial aircraft could apply to $18.3 billion; and an investigation into semiconductors will cover roughly $23.32 billion. The administration has hinted that these investigations will wrap up soon, likely granting an opening for new restrictions.
In addition to noting tariffs on the horizon, it is also worth taking stock of how these non-IEEPA measures have nonetheless shifted the trade landscape. The average effective tariff rate, representing the average tariff cost per dollar on imports, depicts a consistent trend line toward a new US trade paradigm centered on economic security. At the end of 2024, the average effective tariff rate on goods was 2.4% for all US trading partners, 1.2% on the EU, and 10.7% on China; now, without including the paused (and perhaps struck) April 2 “reciprocal” tariffs, the rate is 8.9% globally, 9.4% for the EU, and at least 30.2% for China (much smaller than the 111% if reciprocal and retaliatory tariffs continued). These rates will likely only increase as ongoing Section 232 investigations conclude. In short: if IEEPA tariffs are nullified, the US’ new trade doctrine will not be deterred, even if the tools available set new limits on presidential authority.
Trade Negotiations, Altered: Accelerate or Stall?
Legal uncertainty over IEEPA-based tariffs will not undo a shifting US trade doctrine, but a key question remains how trade partners will react. Attempting to anticipate an unpredictable outcome, diplomats must consider whether to accelerate negotiations and maximize the potential gains of a deal while the Trump administration recovers its leverage, or perhaps deliberately stall talks and assess the landscape, betting on new limits on US policy flexibility that will redefine the terms of the negotiation.
The UK, which has already agreed upon a framework for the so-called Economic Prosperity Deal (EPD), wants to accelerate. The core bargain of the deal—harmonize economic security measures and grant a handful of concessions in sensitive sectors like cars and beef in exchange for preferential treatment on Section 232 and 301 investigations—would survive a disruption of IEEPA-based tariffs and put the UK in a strong comparative position if the Trump administration is forced to rely upon Section 232 and 301 authorities to ratchet-up its trade agenda. Finalizing the EPD would deliver a win for the Trump administration’s policy agenda amid trade uncertainty and provide a model for other countries to emulate that mitigates the most disruptive effects of new restrictions.
Meanwhile, the EU is caught in the middle, likely keeping a steady approach to strengthen its hand while leveraging the uncertainty over IEEPA to narrow the scope of negotiations. It is difficult for the EU to accelerate its talks because of its collective decision-making. The US simply moves faster than the EU: while IEEPA-based tariffs may come or go in the coming weeks, and the administration may be able to react quickly if they are indeed nullified, the EU is rushing its internal bargaining over a list of potential retaliatory measures—ranging from finalizing a retaliatory duties list of €95 billion in goods to activating the newly-minted anti-coercion instrument, which is similar to US Section 301 authority—to prepare for either outcome. On top of the EU’s collective decision-making, the US-EU trade agenda is much larger: the Trump administration has taken aim at the bloc’s digital regulations and digital service taxes—something Europe hopes to mitigate through light deregulation—while the EU hopes to protect its surplus in industrial goods through mutual trade liberalization under a “zero-for-zero” deal. As it stands, the agenda is too vast to be agreed to by July 9, when the now 50% IEEPA-based “reciprocal” tariff is due to be reimposed. The EU may be hoping for a “phase one” deal similar to the UK’s EPD while broader negotiations continue past the deadline.
China’s trade gestures, meanwhile, have clashed with US efforts to decouple emerging technology supply chains in a bid to strengthen economic security. While the US and China agreed in mid-May to significantly lower their retaliatory tariffs to 30% and 10%, respectively, for 90 days, the US has issued new export restrictions on advanced chips and emerging guidance on shuttering Chinese access to American electronic design automation software—a key chokepoint in the chip supply chain where US players comprise 80% of global market share. For its part, China has backtracked on its concession to loosen its licensing requirements for rare earth mineral exports, reverting to its original strategy after Liberation Day: retaliate and pressure the Trump administration to the table. If negotiations continue to falter, Beijing may double down on a strategy of escalating to de-escalate, leveraging the Trump administration’s court drama to its advantage.
The Risks
The court dispute over IEEPA will not disrupt the US’ objective of balancing trade flows and pursuing economic security in an age of heightened strategic competition. However, it may change the behavior of negotiating counterparties and, subsequently, the content of finalized deals. While next steps will be clearer in the coming weeks as the legal dispute is resolved and the US will meet with counterparties at several fora—including an OECD meeting this week and a G7 summit in mid-June—the Trump administration has asked counterparties to bring their best offers by June 4, likely indicating that it wants to accelerate deal-making.
The key question is how will counterparties react: accelerate or stall? If they accelerate and look for a quick deal, it is possible that more EPD-like agreements will be struck, consisting of sectoral carve-outs for important industries and a relaxation on current and future Section 232 and 301 restrictions. This would not be as ambitious as, say, what the EU is looking for, but the opportunity to mitigate risk may be too attractive to pass up. These smaller deals would more narrowly confine new restrictions to areas of economic security while doing less to alter the overall trade balance. A reinvigorated focus on economic security will carry upside risks for most sectors but potentially downside risks for strategic competition between the US and China, which will remain the primary terrain of current and future trade restrictions.
More unpredictable is if counterparties stall, since it is possible that IEEPA-based tariffs could not only stay, but the administration may look to punish stragglers, as evident by the recent increase of the EU’s reciprocal tariff from 20% to 50% for July 9. From the counterparties’ perspective, it may be possible to extract a more holistic deal with restrained US tariff powers, but this would be a negotiation for the long haul. Stalling would increase uncertainty for businesses in the short- to medium-term and perhaps yield a patchwork of different deals, creating a complicated US customs regime.
